Car Financing
Date: Jan 26, 2005
Contributor: Mathew Como
Cheap Car Financing
EVER WONDER HOW AUTO dealerships make money these days? Thanks to the information superhighway, it's getting harder for salespeople to squeeze customers on price. That leaves them with the opaque world of financing to pad their profits.
Nowadays, a dealership's best salesperson is typically the finance and insurance manager. Customers who don't know how to play hardball might get an extra 2% to 3% added to the wholesale interest rate, says Chris Larsen, chief executive officer for E-Loan, an online lender that competes with dealers for auto loan business. "Many people don't realize that after they set the price [of the car] and go into the [finance manager's office], that's when the most profitable part of the negotiating is done," he says.
This is especially true for American automakers, which for years have struggled to compete with foreign producers on price and quality. Consider the latest results posted by General Motors (GM) and Ford Motor (F). More than three-fourths of GM's 2004 profit came from its lending operations, while Ford reaped 85% of its earnings from finance operations. Ford's credit unit earned a record profit of $2.9 billion last year, up from $1.8 billion in 2003. Those profits offset the losses it incurred producing the cars themselves.
Finance managers try their best not to let customers drive away with a bargain. That's why auto experts recommend consumers line up independent financing before they step foot into the showroom.
That's just what 41-year-old Michael Gopen of Gorham, New York, did. Last October, Gopen decided to buy a used 2000 Ford Explorer. Wanting to avoid bait-and-switch shenanigans at the dealership, he filled out auto loan applications beforehand at his local credit union and online. One lender made him a deal he couldn't pass up: an interest rate of just 4.99%. (The average rate for four-year used cars is 7.82%, according to Informa Research Services.) Within 24 hours, Gopen had a blank check in his hand. Now that he was essentially a cash buyer, all he had to do was focus on negotiating a price for the 4-wheel drive SUV that had caught his eye.
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